Overnight liquidity shortage tops Rs.300bn; banks lean heavily on SLF

Sri Lanka’s overnight money market liquidity shortage surpassed the Rs.300 billion level on December 13, after remaining continuously in the negative territory since the beginning of September, when the Statuary Receive Ratio (SRR) hike went into effect, which absorbed nearly Rs.200 billion in banks’ excess liquidity into the Central Bank, to arrest the pressure on the currency and also to pre-empt the price pressures. 
According to the data as of December 13, the shortage in the overnight money market, which stayed over Rs.200 billion for nearly two weeks after stagnating around that range for the most part since September 1, topped Rs.304.97 billion, recording the highest level of negative liquidity in recent times. 
This prompted the banks to lean heavily on the Central Bank’s Standing Lending Facility (SLF) window to borrow at 6.0 percent to meet their daily liquidity requirements. 
The SLF window is where the banks could go to meet their liquidity requirements when the money market liquidity is in deficit. 
For instance, the banks borrowed a mammoth Rs.403.04 billion under the SLF on December 13, substantially increasing from less than Rs.100 billion borrowings made under the SLF in the run up to the August 19 policy rate hike. 
This is not entirely an unexpected development as the Central Bank made explicit on August 19, when it raised the SRR by as much as 200 basis points, effective from September 1, it was willing to provide liquidity via the SLF to meet any gaps in the money market. 
The objective of raising the policy rates by 50 basis points and SRR was to raise the cost of money and also to draw over Rs.280 billion in cash in circulation into the banking system via deposits, so that the supply of money in the economy could soften a bit and thereby ease any inflationary pressures building up. 
In fact, there was a corresponding increase in deposits by banks in the last fiscal quarter ended in September, particularly in the low-cost savings deposits, the interim results of the banks showed. 
The banks use their deposits to meet the lending requirements but any gaps are met through borrowings made via the SLF. 
Lending made over and above a bank’s deposits could create imbalances in the economy via higher pressure on prices and the balance of payments via higher imports, as happened in the Sri Lankan economy. 
While the high level of borrowings made via the SLF typically signal rising interest rates, it was transpired that the bulk of this borrowings were made by large state banks, although they operate with modest liquidity levels.

After a steeper rise, Sri Lanka’s interest rates have largely levelled off during the last one month as seen from the government securities yields.
Sri Lanka’s licensed commercial banks have comfortable level of liquidity as seen from the regulatory liquid assets ratio of 34.4 percent in the domestic banking unit, compared to the required minimum level of 20 percent. 
Meanwhile, in another positive development, the Central Bank has continued to bring down its bill stock to Rs.1,392.38 billion, from Rs.1,414.67 billion a week ago, staying on course of its winding down operation began at the end of October.